Real Unfair Advantages

What if someone copies your awesome business idea?

When I meet an angel investor, he may ask: “What if a big company copies your idea and develops the same website as yours after your website goes public?”

How can I answer this question?

No, the question is: What are you doing now knowing that a big company will copy your idea?

No, wait, the real question is: What are you going to do when another smart, scrappy startup copies it, and gets $10m in funding, and is thrice featured on TechCrunch?

No, wait, I’m sorry, the real question is: What are you going to do when there are four totally free, open-source competitors?

No wait, I forgot, actually the question is: What happens when employee #2 makes off with your code and roadmap and marketing data and customer list, moves to Bolivia, and starts selling your stuff world-wide at one-tenth the price?

The good news: There are good answers to these questions!

The bad news: Almost no one I talk to has good answers, but they think they do. And that’s fatal, because it means they’re not working towards remedying that situation. Which means when one of the above scenarios happens, it will be too late.

The first step is admitting you have a problem.

Last week I detailed the most common misconceptions about competitive advantages, so go read that if you haven’t already.

To summarize: Anything that can be copied will be copied, including features, marketing copy, and pricing. Anything you read on popular blogs is also read by everyone else. You don’t have an “edge” just because you’re passionate, hard-working, or “lean.”

The only real competitive advantage is that which cannot be copied and cannot be bought.

Like what?

Insider information

They say the only way to consistently make money on Wall Street is to have insider information. Unfortunately it’s not a joke, and although it’s illegal (and people occasionally go to jail for it), those in the know will tell you it’s the norm.

Fortunately, using intimate knowledge of an industry and the specific pain points within an industry is a perfectly legal unfair advantage for a startup.

Here’s a real-world example of how this advantage manifests. Adriana has been a psychiatrist for 10 years; she understands the ins and outs of that business. During a lull in her practice she got a serendipitous opportunity to shift gears completely and ended up leading software product development teams. (Turns out that for big-business project management it’s more valuable to be a sensible thinker and counselor than to be an expert in debugging legacy C++ code.)

Now Adriana has an epiphany: Traditional practice-management software for psychiatrists totally sucks; she knows both the pain points and the existing software first-hand. But now she has the vision and ability to design her own software, capitalizing on modern trends (e.g. a web application instead of cumbersome installed applications) and new interpretations of HIPPA regulation (which allows web-based applications to store medical records like patient histories).

Adriana holds a unique position: Expert in the industry, able to “geek out” with her target customer, yet capable of leading a product team. Even if someone else saw Adriana’s product after the fact, it’s almost impossible to find a person — or even assemble a team — who has more integrated knowledge. At best, they could copy. Of course by then Adriana has moved on to version two.

Single-minded, uncompromising obsession with One Thing

A popular comment on the previous post was that a “Unique Feature” could be a competitive advantage in some circumstances. Some examples of a feature being a company’s primary advantage are:

Apple compromises everything in the name of design. Their products are over-priced (magically being profitable at half the price 12 months after release), buggy (how many iOS debacles have there been?), and every experience I’ve had with their tech support has been atrocious, but man their stuff looks and feels nice! (I’m typing this on an Air and there’s an iPhone in my pocket, so no Apple fan-boy mail please.)

Google’s search algorithm was just better, therefore they won the eyeballs, therefore they were able to monetize. Sure Bing and Yahoo are good now, but the advantage lasted long enough.

Photodex is a little company you’ve never heard of I worked for in Austin in the 90’s. We made an image browser with thumbnail previews so you didn’t have to open each file individually to see what it was. (In the 90’s, y’all, before that was built into all the operating systems!) Our advantage was speed. Not the best, not the most stable, didn’t read the most formats, didn’t have the most features, just “fastest.” For many users of that product, speed wins; Photodex now makes tens of millions of dollars a year, and “speed” is still the only point on which they will not compromise.

However it’s not enough for a feature to merely be unique (like my mini-browser) because it’s still easily duplicated. Indeed, most of the innovations we’ve made at Smart Bear in the art of code review have already been duplicated by both commercial and open-source competitors.

Rather, this requires unwavering devotion to the One Thing that is (a) hard, and (b) you refuse to lose, no matter what.

Google has spent hundreds of millions of dollars on their search algorithm, the single biggest focus of the company even today, a decade after they decided that was their One Thing. They refuse to be beaten by competitors or black-hat hackers, whatever it takes.

37signals can build simple — almost trivial — software and earn three million customers because they absolutely will not compromise on their philosophy of simplicity, transparency, and owning their own company, and that’s something millions of people respect and support. Competitors could build trivial web applications too (as Joel Spolsky is fond of saying, “Their software is just a bunch of text fields!”), but without the single-minded obsession it’s just software with no features.

To remain un-copyable, your One Thing needs to be not just central to your existence, but also difficult to achieve. Google’s algorithm, combined with the hardware and software to implement a search of trillions of websites in 0.2 seconds, is hard to replicate; it took hundreds (thousands?) of really smart people at Microsoft and Yahoo years to catch up. 37signals’ ranting platform — a blog with 131k followers and a best-selling book — is nearly impossible to build even with a full-time army of insightful writers.

“Being hard to do” is still a true advantage, particularly when you devote your primary energy to it.

Personal authority

Chris Brogan commands $22,000 for a single day of consulting in an industry (social media marketing) where all the information you need is already online and free. Joel Spolsky makes millions of dollars off bug tracking — an industry with hundreds of competitors and little innovation. My company Smart Bear sells the most expensive tool of its kind. How did we earn this powerful authority, and how can you earn this overwhelming advantage?

I’m a great example of someone who wasn’t an authority on anything, but built that authority over time to the point where now my company (Smart Bear) is untouchable as the leader in both revenue and ideas in the area of peer code review.

Not only was I not an expert on code review prior to building a code review tool, I wasn’t even an expert on software development processes generally! I didn’t give lectures, I didn’t have a blog, I didn’t have a column in Dr. Dobbs magazine, and most interesting of all, I didn’t even know “code review” was going to be what made the company successful!

Authority cannot be purchased. You can’t raise VC money and then “have authority” in a year. A big company cannot just decide they want to be the thought-leaders in their field. Even a pack of hyper-intelligent geeks cannot automatically become authorities because it’s not about how well you can code.

But how does authority convert to revenue? Here’s one tiny example:

I give talks on peer code review at conferences. My competition pays thousands of dollars for a booth, then spends thousands advertising to attendees begging them to come to that booth, then gives sales pitches at the booth to uninterested passersby who are also being bombarded by other pitches and distracted by the general hubbub.

Whereas, because I’m a known authority on code review and software development, I get to talk for an entire hour to a captive, undistracted group of 100 people, self-selected as interested in code review. After the talk typically 5-20 people want to chat one-on-one. Some head straight to the booth to get a demo; for many I give a private demo of the product on sofas in the hallway. It’s not unusual to get $10,000-$50,000 in sales over the next three months from people who saw me at that talk.

That’s just one example! Now add to that: What’s the effect of a blog that tens of thousands of people read? What’s the effect on sales of my writing the book that’s the modern authority of code review?

Authority is expensive and time-consuming to earn, no doubt. But it’s also an overwhelming, untouchable competitive advantage.

(P.S. I’m hoping that the authority I’m slowly earning from this blog will help when I launch my next venture. That’s not why I blog, but I certainly will leverage it when the time comes!)

The Dream Team

In each case, the founders were super-smart, had complimentary skill sets, worked together well (or well enough to get to important success milestones), and as a team represented a unique, powerful, and (in retrospect) unstoppable force.

Of course that’s easy to see in retrospect, and retrospect is a terrible teacher, but the principle can work for any startup, especially when your goals are more modest than being the next Google.

Take the success of ITWatchDogs, the company I helped bootstrap and eventually sell (before Smart Bear). The elements of our Dream Team were obvious from the start:

Common vision. We agreed what the product ought to be and that the ultimate goal of the company was to sell it.

Insider knowledge. Gerry had done another successful startup in the same space, I had deep experience with the language and tools for embedded software, and Michael had decades of experience building inexpensive circuits and processors.

Of course a Dream Team doesn’t guarantee success but it significantly reduces the risk of the startup, and furthermore is difficult for the competition to duplicate.

This is especially true when someone on the team is already successful in their field, e.g. with a massively successful blog or a big startup success under their belt or a ridiculous rolodex. Since those are the kinds of competitive advantages that can’t be bought or consistently created, having that person on the team is by proxy a killer advantage.

P.S. This is the primary competitive advantage in a new startup I’m working on right now (to be announced soon), so shortly you’ll see another example of this theory and — better yet! — you and I both will witness over the subsequent months whether or not this really resulted in a killer advantage! (Yes of course I’ll share details!)

(The right) Celebrity endorsement

Hiten Shah’s third company is KISSMetrics. On the surface, it’s yet another “marketing metrics” company. This is a crowded, mature market with hundreds of competitors in every combination of large/small, expensive/mid/cheap/free, and product/service/hybrid.

But Hiten has something none of those competitors has: Investors and mentors who are celebrities in exactly the market he’s targeting. Folks like Dave McClure, Sean Ellis, and Eric Ries, all of whom not only help via conference call but actively promote KISSMetrics on their blogs, Twitter, and personal appearances.

How much advertising will it take for competitors to overcome Hiten’s endorsements and exposure? Even if a competitor also wanted celebrity endorsement, these guys are taken, and in any field there’s a limited number of widely-known and respected authorities.

Many competitors have more features than KISSMetrics has. I can see the sales pitch now…

The customer objects: “Gee it would be nice to have all those features,” and Hiten responds “Well not really, because Dave, Sean, and Eric all say that those features are actually distractions and don’t add to your bottom line. Our features are the right ones, as evidenced by these 20 companies that have shown increases in revenue.”

Just on the basis of these advisors, Hiten will get hundreds if not thousands of customers. You can’t buy that kind of jumpstart, not even for millions of dollars, because it’s not about faceless leads who saw KISSMetrics in an ad, it’s people who trust Hiten because of his association with other people they already trust.

P.S. If you’re raising money, investors love to see a co-founder or even just an advisor who has been successful before. The VC game is more lemming-like than most care to admit.

Existing customers

Everyone you’ve ever sold to (and those who trialed but abandoned) possess the most valuable market research imaginable, and it’s the one thing a new competitor absolutely will not have.

This is kind of a cheat, because everyone says “I listen to my customers,” which (nowadays) is just as bullshit as “We’re passionate,” but it’s true that if you’re actively learning from your customers and you never stop moving, creating, innovating, and learning, that puts you ahead of most companies in the world.

As a company becomes successful it gains momentum, which means that it’s going in one direction with one philosophy. Like physical momentum, change becomes harder to affect. It’s logical; for example at Smart Bear we have 35,000 users, so making a drastic change to the user interface or typical workflow would mean too much retraining, even if the end result is better.

Even “cool, agile” companies like 37signals are trapped. They’ve been so clear and confident in their philosophy of “do less,” they cannot go after markets where “less” is not more but, actually, just less. For example, with more than a few sales people in a traditional sales organization it’s impossible to use Highrise — the folks-of-many-signal believe pipeline reports and geographic domains and integrated campaign management are unnecessary complications, but actually it’s Highrise that is unnecessary.

Of course the world is changing, and in particular your customers are changing. Normally this leaves room for the next competitor, but if you’re already entrenched you can leverage your existing status, insider knowledge, and revenue stream as long as you’re willing to change too.

You have more money, you’re better known, you have existing happy customers to help spread the word, you have employees to build new things, and you have more experience with what customers actually do and actually need, which means you should have the best insight.

Any new competitor would kill for just one of these advantages. If you’re not using them, how silly is that?

Companies don’t get killed by competition, they usually find creative ways to commit suicide. Office 2010 will be the end of Zoho, if we stop innovating, stop being nimble and flexible in our business model. Then again, if we stop all that, Zoho will die anyway, no Office 2010 needed to do the job.

37signals is trapped inside their self-imposed philosophy, but you don’t have to be.

Go git ‘em

Imitation might be the sincerest form of flattery, but it’s still sucks when someone does it to you.

Of course you can still battle it out in the marketplace, but you need something that can’t be duplicated, something they could never beat you on, then hang your hat on that and don’t look back.

Don’t despair if you don’t have an unfair advantage yet. I didn’t either when I started Smart Bear! But I built toward having some, and eventually earned it.

What else? What other competitive advantages can’t be easily copied, or if they are copied it doesn’t matter? Leave a comment and join the conversation.

Started off well, but the meaningless unsubstantiated fanboy-esque critiques of platforms (e.g. Apple) killed this article for me.

http://www.ecodiamond.com Jason

How does insider information help if a well-funded competitor simply copies your idea and does it better? You say that by then your company will have moved on to version two, but there are plenty examples of “first mover” failures, right?

http://blog.asmartbear.com Jason

Good question.

My experience is that this kind of deep knowledge doesn’t transfer when someone just copies. That is, just copying some concepts and features isn’t enough to capture the entire user experience.

Concrete example: Imagine the sales pitch Adriana will make. Imagine the questions she can field and the personal examples she’ll bring to bear. Imagine the equivalent of “geeking out” she can do with them.

A copycat won’t do any of that. It certainly will come through in the pitch, probably in the customer support, and (more arguably) I think it will come out in the product itself.

http://www.rickenba.ch Ralph Rickenbach

Yet, Adriana does not scale. At a certain point she will have to trust sales people to do the pitch and become as faceless as the competition – or the copy cat will be smart and get some former whatevers as its sales force. So this competitive advantage is neither lasting nor scaling well, is it?

http://blog.asmartbear.com Jason

True, at the level of giving demos. Not true at the level of maintaining the company’s image as the thought-leader in the field.

I’m the perfect example. I wrote the most popular book on code review, I did all the talks, I flew out to customer sites, I did all the demos.

Today though Gregg does all that. Of course Gregg is not a salesguy — he’s a difficult-to-find technical product evangelist. But still it scales enough especially if I’m on hand when it’s useful.

I agree it’s not trivial to scale, but I’m living proof that it’s possible.

Finally, by “long-term” I don’t mean that no one could ever under any circumstances compete. I just mean for, say, 3-5 years. Long enough for you to get lots of other advantages, profitability, a name for yourself, etc..

A good example of that is Dell. Today everyone lets you configure computers online and are similarly priced but it took the competition 5-10 years to figure it out.

http://anotherearlymorning.com Alex Schearer

Are you really telling me, as a VC who would potentially invest a great deal of money into my company, that:

* Passion
* Domain expertise,
* and Authority

Are the three permanent advantages you are looking for? It seems like each of those can be easily acquired by a competitor for a price. Unless of course you believe that there will be only a handful of domain experts / authorities for a given subject.

I thought your last article on what was not a competitive advantage was helpful, but I guess it’s easier to say what a thing isn’t than to say something positive. All of the above qualities are certainly ones I would look for in a start-up but I don’t feel like they are good predictors for success or answer your initial question.

I’d like to hear more your final point about insider information. Perhaps releasing quickly, leveraging market data, and iterating quickly are the only advantages you can sustain? In that environment I believe we should look for excellence in execution — what qualities would predict that?

http://blog.asmartbear.com Jason

I’m quite not saying those things, but it’s a great question because I see in retrospect that I probably haven’t made the point clear enough.

I just posted about how just saying “passion” isn’t enough. I tried (not too successfully methinks) to make the point that obsession with something important even to the point of compromising everything else is often a winning attribute.

In terms of domain expertise and true authority, yes if they’re significant I do believe those are advantages that can carry you for years.

It’s going too far to say that these are permanent or the major predictors of success. Indeed, wouldn’t you agree that if there were simple predictors of success that VCs (and everyone else) would be better than they are at predicting success?

No, rather they do represent tangible and often valuable competitive advantages which cannot easily be ripped off by some random other startup.

That’s not sufficient for success or funding, it’s just a whole lot better than “we’re passionate” or “we’re going to start a blog.”

I agree very much that it’s harder to knock something down than to build it up, and I agree with your criticism that this is the case with these two posts.

Maybe the better summary is: If you can have a real advantage, use it, but even if you can’t, that’s OK, but then don’t THINK you do, just proceed accordingly.

On insider information, see one of my other responses here for detail. On “qualities” for execution, that’s as hard as any interview process, but certainly there are things like evidence that the person is a Get Things Done type, such as previous side-projects, success at summer jobs like mowing lawns or door-to-door sales, or just in the nature of the things they talk about (i.e. action, doing, not philosophy, buzzwords).

http://www.trafficspaces.com Niyi

“As a company becomes successful it gains momentum, which means that it’s going in one direction with one philosophy. Like physical momentum, change becomes harder to affect”

I think that statement encapsulates why new companies are a constantly moving threat to larger, established firms.

We compete directly with Google Ad Manager and OpenX both of which unfortunately have an entrenched design philosophy that can be quite frustrating to some folk. In a sense, this is great because it allows us and other new firms to establish a disproportionate competitive advantage.

On establishing an authoritative and respected voice in the industry, I think nothing beats creating a constant stream of valuable, well researched content on your blog. It could be a year, two or maybe even five but if you are dedicated to giving back to the industry, it is almost natural that you’ll evolve into an authority.

Fred Wilson at avc.com is a perfect example of this phenomenon.

http://istobe.com Doug Bright

Shaping up to be an interesting series, but from a pure business strategy perspective (the kind they teach in MBA courses) none of these are true competitive advantages. In fact, the one thing that’s continually drilled into students is that human resources are almost never a true competitive advantage because a competitor can always hire them away.

The premise that true competitive advantages are hard to come by is right on, however. In fact, it’s even harder than Jason claims. For the average startup it is nearly impossible to have a true competitive advantage unless it is coming out of the gate with a breakthrough (read: probably developed at a university) technology or is first to a market with huge network externalities.

The good news is that, despite the fact that true theoretical competitive advantage is nearly impossible to achieve for a startup, thousands of startups succeed every year. This testifies to the fact that markets are not truly efficient and pure theoretical competitive advantage is not a strict requirement to “make it”.

(Oh, the one competitive advantage that didn’t make the list that probably 90% of successful startups exploit? Selling to an underserved market that is too small to accommodate two players. Very few companies will go after a $10 million dollar market when you’ve already got half of it locked up.)

Bob Walters

Right on, Doug.

These first two posts form a good checklist of things that might prove game-changing. But IMO they provide neither a valid prioritization nor a predictor of success. But perhaps that wasn’t the author’s aim?

I can say this with some confidence, b/c they don’t generalize well. They may predict Google, but not Facebook. Maybe Siebel, but not Oracle.

Things that generalize:

1. Radically innovative (tech) approaches to real (underserved and/or under-appreciated) problems
2. The MBA-type differentiators that you describe (…I have a 5-year exclusive right to…)
3. Unparalleled access to capital.
4. Impossible-to-duplicate team locked in (…I’m starting an NBA-fan social network, and Michael Jordan and Kobe are co-founders and investors…)

And then there’s the most important thing – one that can’t be pitched to VCs – luck!

Great thread…

http://blog.asmartbear.com Jason

Thanks guys.

None of these things are predictors of success, nor are they required for a successful company.

However when VCs are considering which companies to fund, those with some tangible edge are simply less risky.

When considering whether to do the company at all, think about these things but don’t let them stop you. When considering your pitch to an investor who is looking to eliminate risk from the deal, these are more useful.

At the least, consider that in future you should develop some interesting competitive advantages, and work towards that now. between these two posts, maybe that helps focus what things are worth working on and which aren’t that useful.

http://ryansidea.blogspot.com/ Ryan Chatterton

I disagree with your statement about human resources.

I’ve heard the debate go back and forth for a very long time. Is hiring good people the right answer?

I think hiring the RIGHT people is the right answer. The notion that other companies can just hire away your fantastic staff is ill-founded for to solid reasons:

-The first is that you shouldn’t have hired somebody who just wanted a paycheck anyways. You’ve got to find ways to keep them interested in your company’s culture, not just the money in their bank. Read Drive by Daniel Pink.

-The second is that if you implement strategies such as those described in the book above, or a myriad of others that are tackling the very tough issue of employee motivation, your employees will work for you because of your culture and because of the way they are treated. They work for you because they love their job. If this is untrue in your organization, there is a problem.

http://ryansidea.blogspot.com Ryan Chatterton

I meant to say TWO*. oops :D

http://www.scottsauce.com Scott

Doug, that parenthetical point there at the end was really insightful. I’ve been a part of more than one start-up and have paid a dear price for my ‘education & learning.’ Finding a real need and meeting it is always going to be a competitive advantage…

http://www.novalibra.com Tom G

Great series! Thanks for the reminder to focus on the one Big Thing.

http://www.hayessoft.com Michael Hayes

Our unfair advantage was part of our DNA from the beginning, was refined and enhanced over the years, and yet we didn’t know we had it for years.

In short, we really DO care about our customers’ success! It sounds cliche and overused, but there it is. We’re an Austin-based software development company targeting the Education market. Our main competitor, a multi-billion $ behemoth, has all the resources and traction in the world, but a horrible reputation.

My father, an educator all his life, and I started this company to help schools, and we hire former school people who care about teachers, students, and school administrators.

Do we subscribe to “our customers come first?” Absolutely not. I’ve said from the beginning that our employees and their families come first, and I’ve said it publicly and to our customers’ faces. But that employee-centric culture translates directly into over-the-moon effort devoted to our customers.

I don’t care how many companies our competition buys, how big their booths are, how large their sales force is, or how many programmers they have. They’ll never understand our customer base like we do, and they’ll never catch up to our reputation.

http://www.adamldavis.com Adam Davis

Thanks for the great post. I think a slight modification is needed:
“The only real competitive advantage is that which [is very difficult to] be copied and [is too expensive to] be bought.” Anything can be copied or bought given sufficient time and money.

I think the best advantage is valuing something important more than the competition because it’s not obvious. For example, people forget, when Google entered search, everyone thought search was no longer interesting.

http://www.victusspiritus.com Mark Essel

Jason, you obviously put a lot of time and effort into this post (great examples) so I’ll start by saying thanks, this message is really appreciated by tiny startups like mine.

Is it hard to characterize the one thing, since each successful business has their own style variant of it?

Based on rapid changes in momentum within industries is it better to absolutely corner the market on that one thing until the company and market end, or to create a business that is more flexible and capable of moving to the next one thing as a bridge for the next couple of years?

It appears like many startups are one shot wonders and are liquidated and absorbed with varying degrees of success. Skilled founders and team leads do the same thing all over again under a new banner. Are these the most effectively companies, single point solutions? The freedom of starting over, perhaps in a different product/market must be refreshing for serial entrepreneurs.

http://blog.asmartbear.com Jason

You say “freedom of starting over,” and somewhat that’s true, but also you lose all that hard-won stuff like attention, a great team, a product people are buying, … it’s pretty hard to start over.

Of course flexibility is important, otherwise in the fact of disproving evidence you forge ahead.

Defining what’s OK to be flexible on (e.g. exactly who the customer is, exactly what the product is) and what not to be (e.g. how you treat customers, how much time you put into design versus ads versus blogging versus more features), is really hard, and possibly not even worth doing formally.

But you do believe in something. Your personality and your beliefs are something. And the more you can make your business match those, the more successful you’ll be at least in being true to that. That’s not business “success,” but it’s your best shot at it.

http://www.victusspiritus.com Mark Essel

Appreciate the response, my questions were pretty open ended since I’m still debating them most days.

The business extension of ourselves feels like the right way to begin and mold the core of the company culture. It’s easy for that to be the case with 2.2 employees (occasional help), much tougher for 20, 100 or 1000.

I’m always pattern matching, in this case looking for a social need/product fit as well as teaming with folks who share my outlook/philosophies.

skeptic

“What if someone copies your awesome business idea?”

Depends on what is meant by a “business idea”.

A common remark about such ‘ideas’ is that “ideas are easy; execution is hard”. In some cases, yes: Start with a bad idea and then likely execution will be hard. Part of what makes a ‘good’ idea is that execution then becomes routine if not easy.

In simple terms, people who spout “ideas are easy; execution is hard” don’t know what a good business idea is. The truth is, “Good ideas are hard, and then execution is routine.” Sorry Guy.

We can be more clear by addressing your question:

“What if a big company copies your idea and develops the same website as yours after your website goes public?”

Of course, the assumption here is that just seeing the Web site is enough to copy it. Who let the kindergarten kids into this discussion?

The answer is, if the site is based on a good idea, then there is essentially no way they can copy it. Just seeing the Web site, hiring programmers, having a patent portfolio — none of these will be even close to sufficient.

“What are doing now knowing that a big company will copy your idea?”

Again, who let the kindergarten kids in here assuming that big companies can and will copy good ideas? They won’t copy it because they can’t; they can dance ’round and ’round and suppose while the secret sits in the middle and knows, and they won’t figure it out.

The challenge will be worse for them than some (A) native American Indians trying to figure out how their bow and arrow makers can copy the first Winchester lever action rifle, (B) some steel company trying to figure out how to make Kevlar or Teflon, (C) some electronic vacuum tube company trying to figure out how to put 40 computers with a huge instruction set and a 2 GHz clocks on a chip the size of a postage stamp.

Or Soviet radar saw the plane flying over at 80,000 feet and Mach 3, sent up a Mig 25, which could fly at Mach 3.2 or so for short distances before burning out its engines and/or running out of fuel, and the Mig was not successful. Sure, the plane was the SR-71 and flew about 2000 miles like that without running out of fuel or burning out its engines. How’d it do that? For a while, that was an important US military secret.

What to do now, in the commercial world of ‘information technology’, in Web 2.0?

Uh, first we have to notice, so far it is too common to assume that software is just routine encoding of what is easy enough to understand just intuitively and that, thus, just using some software yields sufficient intuitive understanding to make copying the software routine or easy.

But, this view of software is uninformed and naive. Instead, software can be as obscure as we could wish; it’s easy to have software doing work so that using the software gives no hint to how the software is working internally.

Next, if that software is the key, core of some Web 2.0 Web site and, thus, running only on servers behind a firewall in a locked server farm, then duplicating what the software does is from not at all routine up to too difficult to do in business and maybe more difficult, still.

Next, software takes in data, crunches it, and puts out results. It may be that what the software does is powerful in the sense that the results are valuable for the Web site and much more valuable than anything else on the Internet.

How to write such software? Well, the ‘crunch’ part is necessarily mathematically something, understood or not, powerful or not. Then for more powerful software, maybe proceed mathematically? Why? Because with math, can establish some important facts just with some “scribbles” on paper.

Well, to the great frustration of many students in college, math is an old field, now quite deep, with many results of the form “Of COURSE that has to be true, except a solid result says that it’s not; or NO WAY could that be true, but a solid result says that it is.”. We’re talking astounding, nearly beyond belief, obscure in the extreme, and in some cases powerful in the sense above.

So, one key to software that does powerful crunching is some math. Commonly, the corresponding software is astoundingly obscure, but, given the math, writing the software itself is routine or nearly so. So the challenging part is the math. So, part of a ‘good idea’ can be some math. Maybe now Guy is getting a hint of why good ideas can be hard.

But people can copy the math? Not always easily! Here’s the QA section of your local, friendly research library: Dig in guys. See you in about 50 years. Okay, to speed up the progress, take some courses. Yup, need some prerequisites: There is little as frustrating as a theoretical math course without the prerequisites. For the prerequisites, take out four years for a good pure math ugrad degree. Then get about two years of focused grad study. Uh, maybe you want Galois theory, exterior algebra, category theory, and algebraic geometry, and maybe you don’t.

Then do some high quality, original work, which by then you will likely be qualified to do.

See you in about eight years, guys; that’s better than 50 years.

Then, convert the math to software, run it on servers in the server farm, let users connect and get the valuable results, and let others try to “copy” the crucial, core ‘secret sauce’ software, without the eight years or the four years or whatever.

Then that core software is the core of “the business idea” and tough to copy. So, Guy, part of a ‘good’ business idea, and NOT “easy”, is such powerful, difficult to copy, core ‘secret sauce’. Clearly, Guy, you’ve never even imagined that such could exist and, instead, regard a ‘good’ idea as just a slightly more ‘engaging user experience’ or some such. Sorry Guy.

And, since now it’s so easy to bring up a Web site, all such work is easy? Some people say so! Should a Web 2.0 entrepreneur want such a person on their Board? Somewhat less than a biomedical startup would want a witch doctor.

Big business? Likely no one in their management hierarchy would understand the math if it were shown to them. Next, nearly no such manager — with a house, a car, a wife, a child, a dog, a cat, a Corvette, a boat, a vacation home, a 401K account, and stock options — would want to bet their career on work they don’t understand, and they don’t have to. So, they won’t do it. They might USE the final Web site, but they won’t try to develop it as in:

“What if a big company copies your idea and develops the same website as yours after your website goes public?”

Hackers, genius programmers, computer science departments? That ain’t the math, guys, and the math can be DEEP, the deepest, most solid, and often the most astounding and powerful knowledge in our civilization and especially relevant now with so much in computer hardware and infrastructure software. Uh, who likes the exercise that there are no countably infinite sigma algebras? Or, in every separable metric space, each closed set is the union of a perfect set and a set that is at most countable? What’s the difference between the weak and the strong law of large numbers?

So, with a ‘business idea’ with such ‘secret sauce’ on servers behind a firewall in a locked server farm, you have a “Real Unfair Advantage”.

Here’s a two sided issue: If lots of people understood such things, then the opportunity would be much less or gone. So, few people understand such things. So, basically the business world will be able to evaluate just the results as they enter the bank.

For the SR=71 and the Mig 25? The Mig 25 had turbo-jet engines. Well, at about Mach 2, supersonic air is coming in the front and has to slow down to subsonic for the compressor fans to work and, thus, the internals of the engine get too hot. But the SR-71 turbo-jet engines, at about Mach 2, converted over to just ram jet engines where the turbine blades were doing little or nothing and, thus, didn’t burn out.

Your local research university pure math department may welcome you if you have some high Math SAT scores. For a view, see

Yes, we do not expect a lot of such advanced, original math-based highly successful companies in information technology. Yup, that is a special case of the easy we do not expect a lot of highly successful companies in information technology. Or, a movie starts out,

“The early history of America is a tale of great first times. There were men who were first to cross new prairies and new mountains, the first to find gold, silver and copper; to plow new wheat fields and build new settlements.”

So, a theme is ‘first times’ that are not just more of the same of the past. That’s part of the challenge that justifies the reward but also makes it difficult to achieve.

http://blog.asmartbear.com Jason

Thanks for the great rebuttal!

The extent that a business is “copyable” certainly varies a tremendous amount as you said. It’s almost impossible to copy the iPhone, for example, just like your MiG example.

If I could repeat your point in my words, if the implementation is difficult (because of expertise or complexity or innovation or a number of things) then maybe you shouldn’t worry at all about “copying.”

I agree when the thing is as complex as a fighter plane or the iPhone.

However let’s now take the case of many of these so-called Web 2.0 startups. Aside from the scaling problems of Twitter (which are only problems after you’re successful), it’s trivial to copy them. Any of the 37signals products would be easy to copy. Blogging software is easy to rip off. Components like running credit cards, doing shopping carts, basic web analytics, or putting little chat boxes on the screen are all pretty easy to implement.

In those cases, the competitors in that space are very much in the position that companies both large and small are copying each other rapidly. In those cases they need something outside the difficulty of the product.

What would you say to all those businesses?

skeptic

What would I say? They didn’t have a sufficiently ‘good’ business idea. In particular, they need ideas that are more valuable and more difficult to copy.

Next, invite a good mathematician to lunch to discuss how to use new and/or advanced math to convert data that is or can be made available to ‘information’ that will be valuable for some particular, important problem.

There is a LOT of math that was intended to be useful in practice; so, do a ‘fit’, that is, pick a powerful, coordinated ‘triple’ of the data, the math, and the important problem so that the math converts the data to get a valuable solution to the problem. So, start with lists of data, lists of math techniques (or mathematicians), and lists of problems and find a triple that works. Longer lists are more promising! Also ‘insight’ can help!

Where to find mathematicians with backgrounds good for Web 2.0 work? Not so easy; even in most good pure math departments in research universities, some of the topics are not yet very popular. Solid math? Yes. Popular? No.

How to make everyone worth $1 billion? I don’t know how to do that! So, in particular I don’t know how to tell everyone how to use math to be worth $1 billion. Besides, if many people DO take my advice, then its value will start to fade! But, one of my fields of well-proven expertise is giving advice people don’t take!

But math is not the only way. Indeed, there are many rich people; even of the recent ones, only a tiny fraction are mathematicians and at least one, James Simons, has said that math played no role in his success. Still, it did play a role for Andrew Viterbi, Robert Bixby, and others.

Some ‘advantages’ are subtle and distant from math. Most entrepreneurs would be better off looking for non-math approaches.

Where I have something to contribute here is in the potential of math for Web 2.0. For the rest, others have comparable or better qualifications.

Still, likely need to have in some sense a ‘great first time’. Generally tough to see such in the rear view mirror, but the US DoD actually has provided an image in the rear view mirror of how to exploit math so far poorly exploited in business, especially with the recent progress in Moore’s law, the Internet, and infrastructure software.

So, we’re back to ‘great first times’.

http://www.esculonsays.com Alex

A competitive advantage must be valuable, rare, imperfectly imitable and non-substitutable. If a firm can hit on all four of these, I’d say you’re pretty safe.

Also, I think a great advantage can be company culture because it’s one of the hardest things to imitate or duplicate. It’s almost intangible…so it’s not only important to hire “authority” figures but to create a passionate and innovative culture that will propel your business forward.

http://windsor-financial-advisor.com Brent

I agree with the intangibles – with track record being one of them. It’s basic but I think it is true. If a person has a track record of success doing the same thing over and over, they’ve built up the channels and the processes – and the culture – for getting it done. Compare that to someone going about it their first time? Time is another – some people have more time without the constraints of a normal job – especially ones with success already.

http://handscribe.com Sekani Williams

As I see it, the purpose of a competitive advantage is to create an avenue for sustaining growth in spite of external threats.

While I agree that Fanatical Focus, Terrific Teams and Celebrity Cachet all have the potential to create avenues for sustained growth, I share some readers’ lament that these are largely unavailable to bootstrapped web 2.0 startups. So what’s a poor entrepreneur to do?

Two recurring themes in this series suggest an approach. These themes are that competitive advantages:
a. can be built over time.
b. can be complicated and difficult to copy.

Web startups can take inspiration from Amazon’s suggestions engine. As customers use web applications, their activities and preferences can be used to build increasingly accurate predictive models. The models and customer data can be elaborate and extensive. They should also be carefully guarded. The strategic insights gained can be packaged in ways that serve both the startup and the customer. If this is done well, the customer’s sense that “these guys really get who I am and what I need” can be so strong that it drives down churn while increasing repeat business and referrals.

Repeat business and referrals are the ultimate avenues for sustainable growth. Hello Competitive Advantage!

I appreciate what you’re trying to do here, but this topic has been covered in way more detail in books such as Good to Great and In Search of Excellence. History has shown that these books aren’t worth the paper they are written on.

What people need to realize is that companies operate in markets and that markets are complex systems. No one can predict what a market will do. I you could you’d be making millions in the stock market, and not writing stupid blog posts.

Try to understand selection bias and that correlation != causation. (Read Fooled by Randomness for a popular treatise on this topic). I guess you can’t write a blog post saying ‘It’s just random’.

However you’ve read a little too much into this post. Nowhere did I say that having one of these advantages guarantees success, and in fact I believe many companies don’t even need one of these to be successful!

Rather, I’m saying that in the context of raising money, few people have one of these, but when you do it’s a big bonus in your pitch.

Furthermore I do believe that, while not required, these are useful things to attempt to achieve.

Finally, you say I can’t write a post saying “it’s just random,” but that’s exactly what I did in the post linked above, more or less!

We’re in agreement, but that doesn’t mean it’s invalid for me to write about things I think are valuable to at least think about.

http://techstbooks.wordpress.com colin dowling

Nice post. I think you hot the nail on the head with the first point and the last. Problem is, most people starting businesses are dreaming of making a massive consumer product a la Twitter or diff and don’t want to admit tjgat finding a niche to be expert in is the best way to insure success.

The most impenetrable competitive advantage is a happy customer. Whether you win on price or speed or feature set, the best armor you have against the coming competition is the people already on your side. That isn’t to say you can stop working hard for them (hello Altar Vista), but consumers and enterprises are both creatures of momentum. Close then once and you are ahead of your competitors. Stay attentive to their needs and you have a great chance of staying that way.

Thanks again for the thoughtful post.

http://www.thedailymba.com Jarie Bolander

The thing that is hard to copy is the deep knowledge of the pain a customer feels. Those are the insights that truly are competitive. It’s that connection with your end customer that will win the day. Without it, you are just another snake oil salesman.

Deep knowledge takes time, experience and living the pain. Out of all the factors I have seen, knowing and understanding the customer pain points is the single biggest factor in success.

http://www.thebatchwatermarks.com/ Tbw

Hi,
I think the angle on Authority is good but it really should be “perceived authority”. There would be many authoritative pros out there, who wouldn’t have “marketed/sold” themselves as well and hence won’t be considered by the potential audience as authoritative.
Building authority + selling it would create the magic. But selling’s tough.
Overall, a nice article. Good perspective on a very tough question.

http://www.itarsenal.com Rob

These were great. I can’t comment from an MBA perspective but a selfmade solopreneur perspective. Authority and obsession to me seem most accessible. The tactics used to get authority can be gained by innovative use of your skills and time, obsession, a trained specific practice. The others you may need to look for as opportunities develop. You’re going to get flac because people want to see these things as easily attainable but I think you’ve defined some tangible advantages to look out for and stand for.

I hope to gain that slow authority over time doing one specific thing well…for years, and thats provide tech support to entrepreneurs in all sorts of flavors with passion and innovation. Loved the breakdown. Thanks.

http://jayliew.com Jay

Another awesome post!

“unwavering devotion to the One Thing that is (a) hard, and (b) you refuse to lose, no matter what.” <– love this quote. There are some things in my life that I know is hard to do, that I love to do, and I absolutely refuse to lose or be talked out of doing: startups!

I just found you from “The Rise To The Top” and I’m very happy to make your acquaintance.

In the busyness of running a business it’s easy to miss the one thing we have over all of our competition that they will never be able to replicate. It’s ourselves! The more I can integrate my personal story into my coaching practice the more difficult it will be to replicate what I’m doing.

Great article. I think some people are reading “competitive advantage” and are interpreting that as “stone cold lock for exorbitant success.” Advantages come and go…and at times even become a disadvantage – MySpace was first to market and unique.

− To remain un-copyable, your One Thing needs to be not just central to your existence, but also difficult to achieve. −

This is a good article for innovators who want to bring something new to market.

All too often, people seem to confuse the “One Thing” with “The Next Great Thing”. Innovation may not be the easiest skill to acquire but it is not the end all and be all that so many people tout it to be. The marketplace is littered with examples of “fusion” or “ground-breaking” products that really boil down to “being different solely for the sake of being different”.

“Different” does not necessarily bring anything of real value to the table. However, a “different” solution to an existing market need can be another thing altogether. This is where “un-copyable” and “difficult to achieve” enter into the equation. Uniting workplace experience with application-specific knowhow in order to create a functional tool that usefully addresses client needs is where the real traction begins.

Put another way; thinking outside of the box is all well and fine but if doing so has also distanced you from real-world requirements then it’s just more of being different for difference’s sake.

All too often, I have seen colleagues or employers appropriate a concept of mine without considering what it actually took to come up with that idea. When all is said and done, they may walk away with my method or design, but what they don’t get out of it is the ability to come up with another inventive approach to whatever problem is waiting just around the corner.

That is the true “difficult to achieve” aspect of coming up with a marketable idea and it requires both a depth and breadth of knowledge that cannot be copied or readily acquired.

http://www.searchengineoptimisation.com Mike

On internet, you cannot do much to stop other copying your concepts and ideas….i have seen some times copied ideas becomes more popular as compared to the original websites same as crap and copied contents ranks on top as compared to original blog poster some time in google….

Over the time i have seen many concepts which was copied in terms of tools or webbased softwares which worked well and got branded while original concept failed or shut down

This is good article to read

http://www.bbbcubed.com Craig

Great post; but consider facebook. Hardly original, but a startup that copied the existing big players. I tend to think innovation is the key to remaining original and ahead of the competition.

http://www.giarty.it Francesco Giartosio

Very interesting post. I’m fascinated from the issue of how startups can compete, and pass the initial lag with the existing businesses. Someday I should research it thoroughly and write a book about it.
I agree that very seldom you will have a strong patent, and without that you have really no advantage, actually a big disadvantage. Incumbents have huge pockets, famous brands, expert employees, a structured organization, market knowledge, access to the best service providers, etc. On paper we have no chance, and yet we sometimes succeed. Yelp has copied Foursquare check-ins, and Facebook had copied Twitter status update, and still Foursquare and Twitter are alive and kick’n as ever before. If your idea seems to work, your suppliers will easily replicate your product and sell directly to your customers, your customers will try to buy directly from your suppliers, your employee will do the job on his own. How can we make it?
I think, as you suggest, that what allows us to at least grab a part of the market, is a maniac focus on the specific thing we want to offer. But I also believe that when you launch a startup you must keep thinking obsessively at who could want to replicate your service, and how to fight him.

http://www.giarty.it Francesco Giartosio

Thinking of Adriana, actually a solution to the competitivity issue is to plan a service that includes both technology and professional knowledge (to be delivered, not only to be developed). This way, in order to compete with you a software developer and a professional network need to get together, and this is harder than you would think …

Good post Jason. This is an interesting post with valuable information to anyone with a startup or thinking about launching one. I specially like the one about “unwavering devotion to the One Thing that is (a) hard, and (b) you refuse to lose, no matter what.” because I believe this is the greatest competitive advantage and possibly one of the hardest to obtain.

All of this is useful thinking, and reminds that nothing is universally applicable. The list of potential “yeah buts” is infinite.

My personal bias is for pricing power, without which it’s really hard to absorb the inevitable cost of being wrong. The presence or absence of pricing power is also a fairly reliable indicator of relative market maturity and the impact of the problem you solve. Low impact = low pricing power, and vice versa.

We visualize an “impact ladder,” in which your customers grant you progress upward from the base: Relevance > Utility > Value > Indispensability. The oft-discussed “product-market fit” is the measure of indispensability, i.e., “if this was no longer available, how much would you care?” First, though, you have to be relevant to the customer’s world or they have no reason to engage you in conversation. If you’re relevant long enough, they may just give you a chance to be useful. If your usefulness delivers meaningful impact against the underlying driver-problem, then they’ll see you as valuable, giving you a chance to earn indispensability over time. IMO, too many products fail the Relevance test.

http://thoughtalliance.wordpress.com/ Lance Woodson

Jason, excellent post. My partner and I have been discussing ideas along these lines. We’re behind you in the process, but its good to know that we’re on the right track. Any chance you could delve more into the concept of ‘authority cannot be purchased’? What were the milestones for becoming authoritative? What did you do right along the way? What did you do wrong? Maybe you can become the authority on becoming an authority, haha.

http://blog.asmartbear.com Jason

I’m certainly no the authority on authority; into end I doubt there’s more to it than dedication, passage of time, and luck. See the post in the “popular” sidebar about the growth of this blog for details.